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Foundry work may signal chip rebound

The two largest semiconductor foundries in the world are experiencing an increase in production. Is it a sign that the predicted semiconductor recovery has begun?

Semiconductor foundries, which manufacture chips for companies that don't have their own factories, are experiencing an increase in production--a sign that the predicted semiconductor recovery has begun.

Both Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp., the two largest foundries in the world, say they see a marked increase in fab utilization, or the percentage of total factory capacity used during a given month. "Fab" is short for chip-fabrication plant.

"We are currently at 70 to 80 percent capacity," said F.C. Tseng, the deputy CEO of TSMC. "By the fourth quarter this year, we will exceed 85 percent."

Meanwhile, UMC, also based in Taiwan, has seen use rates climb from 36 percent in the third quarter of last year to 50 percent in the first quarter of 2002. The company predicted in April that plant use would come it at around 70 percent for the second quarter of 2002.

Because a large number of semiconductor companies now use foundries rather than build chips themselves, an increase in fab utilization can be viewed as a sign that the overall market is recovering. Foundries don't make chips unless their customers, such as Broadcom or Nokia, order them, and these companies don't place orders unless demand improves.

The success of the foundries doesn't translate exactly to the overall market. Because they manufacture chips on behalf of a wide number of customers, foundries see the results of industry changes more rapidly than their customers do.

"The trend for foundries is a little bit stronger than (for) normal semiconductor companies," TSMC's Tseng said.

Still, the increased use of capacity means that someone, somewhere, is ordering more chips. Between January and May, TSMC reported an increase of 12.3 percent in sales compared with the same period a year ago. Sales in May alone rose 78 percent, from $244 million to $434 million. In April, UMC reported its first quarterly profit in a year and expects the trend to continue into its second quarter.

Soaking up the output
The fab-use data bolsters a report issued this week by the Semiconductor Industry Association that shows worldwide sales of semiconductors totaling $11.37 billion in May, a 2.8 percent increase from the $11.07 billion level reached in April. The SIA predicts that sales will increase 9 percent this year, 23.2 percent in 2003 and 20.9 percent in 2004.

Wireless devices and consumer-electronics products, such as DVD players and liquid-crystal displays, largely explain the increase in production. At UMC, for instance, only 26 percent of its output in the first quarter of 2001 went to the consumer market. Now, 36 percent of the chips it makes wind up in consumer devices.

Regionally, chip buyers in the Asia-Pacific region are soaking up the increased output. From April to May, semiconductor sales to Asia-Pacific, the largest market for semiconductors, rose 4.8 percent; sales to the United States rose 1.3 percent, according to SIA figures.

Compared with May 2001, worldwide semiconductor sales in May were down 10.5 percent. Sales to Asia-Pacific, however, were up 22.4 percent, and sales to the United States, Europe and Japan were all down more than 20 percent.

A good portion of the chips sold to Asia-Pacific, however, are re-exported, said Doug Andrey, an analyst for the SIA. The group only tracks chip sales to the buyers of first instance, usually a distributor or manufacturer of switches or PCs.

"If Flextronics buys chips for its Asia-Pacific plants for products that get re-exported elsewhere, it's counted as sales to Asia-Pacific," Andrey said.

Predictions of a turnaround in the semiconductor market, though, must be viewed with caution. The industry's mood swings often defy expectations. After a three-year trough that lasted from 1996 through 1998, the industry was supposed to experience a boom from 1999 through 2001.

Although sales rose in 1999 and the first part of 2000, they ground to a halt in the second half of 2000, leading to a whopping 32 percent decline in 2001.

Many companies, including TSMC, are also seeking to expand manufacturing facilities, especially in China. Several Chinese companies are also jumping into the foundry business. Historically, every time a new nation enters the semiconductor market, a glut results and depresses the profit picture for existing manufacturers.

"From a supply point of view," Tseng said, "you probably don't need these facilities."